Update and re-estimation of the quarterly model of Banco de España (MTBE)

The Quarterly Model of Banco de España (MTBE, Modelo Trimestral del Banco de España) is a large-scale macro-econometric model used for medium term macroeconomic forecasting of the Spanish economy, as well as for evaluating the staff projections and performing scenario simulations. The model is specified as a large set of error correction mechanism equations, and, especially in the short run, is mostly demand driven. This paper presents an update of the model, estimated with data from 1995-2012. In this new version, private productive investment and employment react more to output, capturing the higher sensitivity of these variables observed during the crisis, and prices and wages react less both to each other and to the evolution of real variables. Credit is now an endogenous variable in the model and it also helps explain the behaviour of the main demand components. As a result of all these changes, simulations now generally display a somewhat stronger demand channel and show nominal effects that are both smaller and with less inertia. The updated model describes an economy that is more reactive to financial shocks other than changes in interest rates, where wage moderation can generate growth and employment if it is followed by price moderation and where fiscal consolidation reduces public deficit and has negative but moderate effects on GDP.